What is Futa and Suta Tax?

By Colin Gordon | 09.02.2022

As an employer or business owner, there are various taxes that the federal and state government requires you to pay. For instance, the W-2 employee (FICA) tax requires you to withhold your workers’ money to cater for medicare and social security taxes. With the W-2, employers will also contribute a share of those taxes. In addition, business owners should pay SUTA and FUTA taxes to the federal and state government. If you are just setting up a new business and looking to learn more about these taxes, we have prepared this guide for you. So, read along to have a complete understanding.

What is FUTA Tax

The Federal Unemployment Tax Act (FUTA) is a payroll or unemployment tax that employers pay to the federal government to fund unemployment insurance programs and unemployment benefits for individuals with no jobs. FUTA tax rate is 6% of the first $7,000 paid to an employee annually. Keep in mind that earnings exceeding $7,000 are not taxed, and it is the employer who pays this tax and not employees. 

What is SUTA Tax

The State Unemployment Tax Act (SUTA) is a state version of the FUTA tax. This means that instead of funding the federal government’s unemployment and benefits programs, employers will be paying the state government to fund unemployment insurance programs. Unlike the FUTA tax with a single federal regulation, SUTA’s that employers must comply with vary by state. 

Who Pays FUTA and SUTA Tax

FUTA and SUTA taxes vary, considering that every state has its own regulations for the SUTA tax. However, when it comes to eligibility on who is required to pay these taxes, the criteria are almost similar. Simply put, your business must meet the following for you to pay FUTA and SUTA taxes. 

  • Your business must have paid at least $1500 in wages to employees within the calendar quarter. 
  • You had at least one employee working either consecutively or non consecutively for at least 20 weeks within a calendar year. 

Who is Exempt From FUTA and SUTA

Unemployment insurance from SUTA and FUTA taxes should be paid to unemployed individuals who are jobless or laid off for reasons that are not their fault. If an employee quits their job or is fired for valid reasons, they are not eligible for unemployment insurance and benefits from the state and federal government. Note that the beneficiaries of FUTA and SUTA benefits must be actively searching for a new job. 

There are businesses that are also exempted from paying FUTA and SUTA taxes. These include non-profit organizations, religious, educational, and charitable institutions. In addition, some government institutions and businesses with a handful of employees are also excepted. To have a better understanding, check the tax commission for your state since they vary. 

How is SUTA and FUTA tax calculated

Since state rules vary, every employer will receive the SUTA rate they should pay within a calendar year. Generally, all state and federal taxes are calculated and paid differently. In this regard, it is essential that you understand how they are calculated to avoid under-or over-paying your SUTA or FUTA tax liability. 

The process for calculating these unemployment taxes is pretty straightforward. For the SUTA tax, you simply need to stay abreast with the current state rate. You will then multiply the total wages paid to employees by the current rate. For instance, if an employee receives $4000 bi-weekly and the SUTA tax rate is 6%, you should be able to pay $240 in taxes. Remember, your tax payment will be limited to the wage limit within your state.

When it comes to FUTA tax, you will start by figuring out all the payments paid to your employees, including salaries, wages, sick pay, bonuses, contributions towards the 401(k), etc. You should check form 940 instructions for complete list payments for FUTA tax calculation. With the current 6% rate on amounts not exceeding $7,000 on each employee’s earnings, employers can easily calculate the amount of taxes to pay. 

Keep in mind that the federal tax rate can only be reduced upto 5.4% of the SUTA tax rate. For instance, if your state rate is 3%, the FUTA rate will also be 3%. However, when the SUTA rate is 7%, your federal tax rate will be 0.6% since employers can only take credit for the first 5.4%.

Suta vs Futa

Under FUTA, employers are required to take 6% as the unemployment tax rate from an employee’s first $7,000 in wages. You can lessen the burden of FUTA tax by often paying SUTA tax. As mentioned above, SUTA gives employers a tax credit of upto 5.4% only if they make payment on time and in full. This means that if you qualify for the highest credit, expect 0.6% as the net rate. Also, you can only pay a minimum amount of $42 as FUTA tax per employee. 

While the FUTA payroll tax is constant, the SUTA tax rate varies with a state, and it is crucial that you stay abreast with your local rates to keep up with your tax obligations. Note that you can minimize these tax obligations by filing taxes on time and making quick responses on unemployment claims. In addition, you can include automated software to simplify all tax filing processes and avoid unnecessary terminations and layoffs.

 

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